CBDCs for Dummies: Everything You Need to Know © 2021 IAI about Central Bank Digital Currency (And Why You Shouldn’t Be Afraid of It) by Nicola Bilotta ABSTRACT “No cash accepted in this store”. What might seem to some like science fiction is on its way to becoming reality. The rise of non-cash payments is a global phenomenon, although moving at different speeds around the world. To keep up with ISSN 2610-9603 | ISBN 978-88-9368-198-8 the digitalisation of payments (and of the economy), many central banks are exploring the development of Central Bank Digital Currencies (CBDCs), a digital form of cash. Despite being confined to a technical discussion among experts, when (rather than if) launched, CBDCs concerns us all. Thus, raising awareness of what CBDCs are, and of their key economic and political dimensions, is crucial to ensure that citizens are not only passive spectators. This paper has the ambition to provide (non-expert) readers with straightforward and simple answers to some of the many questions they may have around CBDCs. It sets the ground to better understand what CBDCs are (and are not), their drivers and their possible design. It will explore the impact of CBDC systems on privacy, the geo-strategic drivers of CBDCs and the possible rivalry between public and private money. Currency | Digital policy | Financial services | European Union | China | keywords USA IAI PAPERS 21 | 24 - JUNE 2021 IAI PAPERS CBDCs for Dummies: Everything You Need to Know about Central Bank Digital Currency (And Why You Shouldn’t Be Afraid of It) CBDCs for Dummies: Everything You Need to Know about Central Bank Digital Currency (And Why You Shouldn’t Be Afraid of It) © 2021 IAI by Nicola Bilotta* Introduction In the near future, and much sooner than you expect, you will pay your grocery or restaurant bill using your phone. Maybe you are already doing this through Google Pay, Apple Pay or one of the growing number of other payment apps on the market. You connect your credit or debit card to the app and proceed with the payment. Easy and handy, right? Mobile payments – together with old-fashioned credit and debit cards – are consolidating the mega-trend of non-cash payments. Behind the scenes, nothing much changes from card transactions to mobile transactions – they are all initiated and processed within the traditional payment “architecture”. So what is a Central Bank Digital Currency (CBDC), and why does it establish a ISSN 2610-9603 | ISBN 978-88-9368-198-8 different system from the one in which you use your credit card or mobile payment app? Why are central banks worldwide thinking about developing a CBDC? Could it have major effects on the way in which our economies and societies work? Could it have also geo-strategic implications? 1. The way forward for CBDCs Before explaining what CBDCs are (and are not), we need to understand why today this is such a “hot” and timely discussion. To be clear, cash will not disappear anytime soon: it remains the most widely used payment instrument in the world, and a 2018 G4S report shows that demand for cash has actually increased. Globally, the average amount of currency in circulation accounted for 9.6 per cent of gross domestic product (GDP) in 2016 – up from 8.1 per cent in 2011. In Europe, 78.8 per cent of all transactions were conducted with cash; the global average was 50 per * Nicola Bilotta is a Researcher in International Political Economy at the Istituto Affari Internazionali (IAI). IAI PAPERS 21 | 24 - JUNE 2021 IAI PAPERS This paper was prepared in the framework of a research effort on the risks and the opportunities related to Central Bank Digital Currencies (CBDCs) with the support of Intesa Sanpaolo and the Bank of Italy. The author would like to thank Giuseppe Ferrero for his comments and suggestions. 2 CBDCs for Dummies: Everything You Need to Know about Central Bank Digital Currency (And Why You Shouldn’t Be Afraid of It) cent.1 People like, and trust, cash. According to a survey carried out by Deutsche Bank, among the top five reasons people love cash is that they appreciate that it allows better tracking and spending, while making payments faster.2 Figure 1 | Percent of cash used in total transactions by volume % in selected countries © 2021 IAI ISSN 2610-9603 | ISBN 978-88-9368-198-8 Source: Author’s elaboration from McKinsey & Company, The 2020 McKinsey Global Payment Report, October 2020, https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/ our%20insights/accelerating%20winds%20of%20change%20in%20global%20payments/2020- mckinsey-global-payments-report-vf.pdf. However, driven by the consolidation of e-commerce and the growing availability of non-cash payment instruments, global non-cash transactions reached a total of 708.5 billion in 2019, an 80 per cent surge since 2014.3 This mega-trend is likely to keep growing. Smartphones provide consumers with an exceptional opportunity to easily access mobile payment means such as e-wallets and e-money solutions. According to the Global System for Mobile Communications Association (GSMA) 1 G4S Cash Solutions, World Cash Report 2018, August 2019, p. 25, https://www.g4scashreport.com. 2 Marion Laboure and Jim Reid, The Future of Payments - Part I. Cash: the Dinosaur Will Survive… For Now, Deutsche Bank Research, 21 January 2020, p. 6, https://www.dbresearch.com/PROD/RPS_ EN-PROD/PROD0000000000504353/The_Future_of_Payments_-Part_I_Cash:_the_Dinosau.pdf. IAI PAPERS 21 | 24 - JUNE 2021 IAI PAPERS 3 Capgemini, World Payments Report 2020, October 2020, https://worldpaymentsreport.com/ resources/world-payments-report-2020. 3 CBDCs for Dummies: Everything You Need to Know about Central Bank Digital Currency (And Why You Shouldn’t Be Afraid of It) Mobile Economic Report, the number of unique mobile-phone subscribers globally is 5.1 billion, or 67 per cent of the world’s population. By 2025, the figure is expected to hit 5.8 billion – of which, 5 billion will also be mobile internet subscribers.4 Moreover, younger people seem to prefer to pay using mobile payment solutions rather than credit or debit cards. If people do not have an entrenched habit of using cards, mobile payments seem to be more appealing to them. This behavioural shift is noticeable, for example, in China and India, where consumers have switched from cash-based transactions to digital payments, finding the latter more © 2021 IAI convenient and easier to access than cards. In China, 49 per cent of the population uses mobile payments, a figure which is likely to increase to 60.5 per cent by 2023.5 In sub-Saharan Africa, around 10 per cent of aggregate GDP in transactions occur through mobile money – in Kenya, M-Pesa alone accounted for 50 per cent of the country’s GDP in 2018.6 This context helps us understand the global framework that is fostering the current discussion around CBDCs. There are several reasons why countries are exploring this innovation, depending on their individual socio-economic situations. A main driver of the trend is the fact that cash has high costs related to the printing, transporting and storage of coins and bills. Issuing a CBDC could require high sunk costs – to develop the technology that supports it, for example – but its subsequent scalability would reduce the expenses associated with money in the long term. In emerging markets, it could also foster financial inclusion. The powerful experience of mobile payment solutions in Asia and Africa has much to teach us, as it has provided unbanked people with a cheap and easy way to pay ISSN 2610-9603 | ISBN 978-88-9368-198-8 and manage money. However, if retail digital payments are currently only enabled by private corporations, countries risk being dependent on the private sector for a core function of their economies. In order not to be left behind or outcompeted by the growing initiatives undertaken by the private sector, central banks would – with a CBDC – regain some control over risk and have a role to play in the digital payment market.7 These are only the main reasons why, out of 66 central banks representing 90 per cent of global output, 80 per cent are currently (or soon will be) working on a CBDC – up from 65 per cent in 2017. Those countries that are not yet engaging are either very small or have more urgent priorities. Nevertheless, 70 per cent of the 4 GSM Association, The Mobile Economy 2020, February 2020, https://www.gsma.com/ mobileeconomy. 5 “China Is Moving Toward a Cashless Society”, in eMarketer, 25 November 2019, https://www. emarketer.com/content/china-is-moving-toward-a-cashless-society. 6 Amadou N.R. Sy, “Fintech in Sub- Saharan Africa: A Potential Game Changer”, in IMF Blog, 14 February 2019, https://blogs.imf.org/?p=25686. 7 See: Massimo Cirasino, “CBDC in the Broad Context of National Payments System Development”, IAI PAPERS 21 | 24 - JUNE 2021 IAI PAPERS in Nicola Bilotta and Fabrizio Botti (eds), The (Near) Future of Central Bank Digital Currencies. Risks and Opportunities for the Global Economy and Society, Bern, Peter Lang, 2021, p. 41-74, https://www. peterlang.com/view/9783034342919/9783034342919.00008.xml. 4 CBDCs for Dummies: Everything You Need to Know about Central Bank Digital Currency (And Why You Shouldn’t Be Afraid of It) respondents to the Bank for International Settlements (BIS) report stated that it was unlikely or very unlikely that they would issue any CBDC in the short term, while 10 per cent responded that they are ready to do so and 20 per cent said they are considering implementation in the medium term.8 Figure 2 | CBDC progress worldwide © 2021 IAI ISSN 2610-9603 | ISBN 978-88-9368-198-8 Source: Author’s elaboration from Atlantic Council, “The Rise of Central Bank Digital Currencies”, in EconoGraphics, 20 April 2021, https://www.atlanticcouncil.org/?p=255912.